Dollar Weakens Ahead of Fed Announcement

A weaker U.S. Dollar helped drive the Euro and the British Pound higher while underpinning February gold and crude oil. The Greenback weakened on Wednesday as traders expected the U.S. Federal Reserve to announce replacement stimulus for its Operation Twist program that expires at the end-of-the-year. The new stimulus plan is expected to be announced by the central bank’s monetary policy committee later in the day. 

Although the dollar has been trading softer because of U.S. budgetary issues, the action the past few days has been mostly about the weakening dollar. Today, the Fed is expected to announce it will buy approximately $45 billion of longer-maturity bonds while selling an equal amount of short-term securities. Since this action is designed to keep interest rates down, the Greenback is perceived as weaker, leading to a rise in foreign currencies and commodities. 

Since traders are building the Fed’s action into the market, there is still risk to the downside if it decides to do a smaller size, or delay the program until early next year. Additionally, shortly following the Fed announcement, long traders may decide to take profits in an effort to fulfill the “buy the rumor, sell the fact” adage. 

The EUR/USD rallied through its current retracement zone at 1.3001 to 1.3030. Intraday momentum could slow throughout the session ahead of the Fed announcement. The GBP/USD also strengthened, taking out the recent top at 1.6130 to turn the main trend to up on the daily chart. Although the next target is 1.6174, traders are taking profits, leading to some weakness in front of the Fed. 

The weaker dollar led to a rise in February gold, but the rally ran out of steam when the market tested a 50% price level at $1720.60. Today’s reaction to the falling dollar looked tentative which could be a sign of impending weakness. Due to the weak nature of this market, it appears that investors are more likely to buy dips rather than chase it higher. 

February crude oil is catching a bid this morning following Tuesday’s successful test of support near $85.00. Overall, supply is still a concern as well as the possibility of aU.S.recession if a compromise can’t be reached regarding the fiscal cliff issue. The market may retrace to a pivot level at $88.00, but a move to this price is expected to attract fresh selling pressure.